Housing Bubble CrashAnecdotes From Around The Country
Subprime Defaults To Soar, Hurt Lenders, Funds Say
By Alex J. Pollock
3-17-7

"'It's really a liquidity crunch,' said Scott Bice,
commissioner of the Mortgage Lending Division of Nevada. 'I could give
you horror story after horror story over here of a maid owning eight rental
properties, a Clark County worker making $30,000 a year who got into an
investment club and now she's got a $2.5 million mortgage in her name,'
he said."

"There's no way to spin this into good news, investor
Gary Anderson of Reno said. He wants to know how people with low credit
ratings, the target for subprime lenders, are going to come up with just
5 percent, or $20,000, to buy a $400,000 starter home. And where are people
with good credit going to turn when they want to refinance out of their
exotic loans?"

"'The party is over and the fat lady is singing.
(Federal Reserve Chairman Ben) Bernanke may lower rates, but the dollar
will tank if he does,' Anderson said."

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The Star Ledger from New Jersey. "A property
appraisal Michael Meehan conducted in Chester Township more than two years
ago noted improvements such as a new kitchen, two new bathrooms, new plumbing
and 17 new exterior windows."

"NJ Affordable Homes then used that appraisal to
help one of its investors obtain a $375,000 mortgage. But there were at
least two problems with Meehan's work, federal prosecutors said: He never
went to Chester to visit the property, and the land was vacant."

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The Salinas Californian. "The number of
foreclosures in Monterey County surged by more than 150 percent over the
past year. The month of February saw 62 foreclosures in the county, a roughly
400 percent increase over the same month in 2006, which saw 12 foreclosures,
according to the Monterey County Recorder's Office."

"In February, the median price for a single family
home in Monterey County was $657,000 - down from $700,000 the same month
last year, according to the Monterey County Association of Realtors. In
north Salinas, the median price last month was $568,000, compared with
$665,000 the year before."

"'Buyers have time to look around (and) take their
time,' said Lucy Jensen, a Soledad-based real estate agent. 'The days of
the buying frenzy are gone.'"

"Subprime lending is especially prevalent in Salinas,
where the median home price is about $550,000, but the median household
income is less than a 10th of that. Nationally, subprime lending accounts
for about 10 percent of home loans. One local real estate agent said that
figure could be as high as 70 percent in Salinas."

"'These are just foreclosures waiting to happen,'
said Ariel Torres, an agent in Salinas."

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From Reuters. "Only a few weeks ago, a borrower
in Southern California could qualify for 100 percent financing for a house,
with no proof of income or assets. Now, the lending spigot is dry."

"'Everybody is running scared,' said Yamila Ayad,
a San Diego mortgage broker. 'I have been getting these flashes across
my screen: This product is going away,' she said. 'They have retracted
the products.'"

+++

"It was all too easy for Jason St. Martin of Franklin
to get a $600,000 loan in the summer of 2005. 'I'm a teacher. There's no
way that I could have afforded a $600,000 loan for two years,' St. Martin
said."

"He used the loan to commission two 'spec homes,'
houses that, once built, he intended to sell at a profit. But things went
wrong, and he wound up with two half-built houses in a market flooded with
inventory - and $535,000 still due."

"His foreclosure process started last week."

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The Press & Argus from Michigan. "The
home of recently divorced state Rep. Chris Ward is in the process of bank
foreclosure. According to a legal notice, Ward and his ex-wife owe $158,292
on their home in Brighton Township. County records put the value of the
property at less than $100,000."

"The Wards are not alone in Livingston County. In
the first two months of this year, 138 foreclosures have been filed with
the Register of Deeds. During the same period in 2006, 72 were filed. And
in the same two months in 2005, only 31 were filed."

+++

"Homeowner Tom McClaughlin is familiar with foreclosures.
McClaughlin refinanced his mortgage but with bad credit, his only option
was a high interest loan with payments higher than his first mortgage that
he couldn't afford. 'Ended up making the worst mistake of my life,' said
McClaughlin."

"McClaughlin said it was something he couldn't afford
but the broker falsified his income so he'd qualify. 'They did that just
so I could get the loan,' he said."

"Minnesota Attorney General Lori Swanson said falsifying
income is a common practice. 'In some cases brokers will make up jobs that
people don't have or extra income that they really don't have,' said Swanson."

"She said some brokers don't care if homeowners
default since they will sell the mortgage anyway. 'Putting people from
product to product, refinancing them in order to make a commission and
not really caring about what's in the best interest of the consumer,' said
Swanson."

+++

Some housing bubble reports from Wall Street
and Washington. "Pulte Homes Inc., the fourth- largest U.S. homebuilder,
said the housing market is unlikely to have a quick recovery as buyers
wait out the drop in prices. 'We're not projecting anything to bounce off
the bottom at this point,' CFO Roger Cregg said at a UBS conference in
London. 'There's been a lot of buyers that have moved to the sidelines.'"

+++

The Associated Press. "Financial services company
National City Corp. on Wednesday said it has not been able to sell some
$1.6 billion in nonconforming loans amid a downturn in the market for mortgage
loans made to borrowers who do not qualify for conventional loans."

"The company has written down the fair value of
those loans by $11 million through February and said further write-downs
are likely."

+++

"Lawyers for investors hurt by the meltdown
of mortgage lenders that cater to risky borrowers are likely to file a
wave of class-action lawsuits against the lenders and possibly their auditors
and bankers as well."

"'There is no question that there are lots of bells
and red flags as to where were the third parties and what was their role
in this,' he said. 'What about the auditors? What about the banks. These
are questions that the investors that bring these cases are going to have
to really work hard to figure out.'"

+++

"House prices could tumble 10% this year
and force the United States into recession if a credit crunch taking shape
in the mortgage market gathers steam, Merrill Lynch said in research notes
this week."

+++

From Peter Schiff. "Those who believe that
the subprime market is unrelated to the broader economy do not understand
thatit's just that the subprime sector, being one of the most vulnerable
spots, is where the problems are first surfacing."

"The bottom line is that far too many Americans,
not simply those with low credit scores, have borrowed more money than
they are realistically capable of repaying."

+++

"The fix now being suggested by some members of
the U.S. Congress demonstrates how Washington completely misunderstands
market dynamics. Washington fails to grasp that a return to traditional
lending standards would precipitate a return to traditional prices, which
are way below current levels."

"However, continuing to look the other way is no
panacea either, as the real estate market is already in the process of
collapsing under its own weight."

"It is also typical and very disingenuous for lawmakers
to feign outrage and to have waited until a collapse has occurred before
taking action. Had the government taken preemptive action with regard to
mortgage lending, the real estate bubble never would have inflated to the
degree that it has."

+++

The News & Observer reports from North
Carolina. "Raleigh Realtor Gary Hooker already has lost three sales
to first-time homebuyers since lenders this month began cracking down on
easy mortgage money. But his real worry is the effect that tougher restrictions
on subprime borrowing may have on the Triangle's unsteady housing market.
Hooker said his clients weren't able to get mortgages because they could
not meet a new requirement for a 5 percent down payment."

+++

"Robin Green is finding out just how hard. Green
fell in love with a $164,000 house. Even though her credit history suffered
from large medical bills and a recent bankruptcy, she was able to get a
contract on the home. Then Green got a call from her mortgage broker telling
her things had changed. She would need to increase her credit score substantially
or come up with a 5 percent down payment."

"'I was like, 'Oh my God, I'm not going to be able
to get this house,' Green said."

+++

"'As Florida was rocketing up in values, we had
lots of investors that bought with the expectation of flipping these homes,'
said Jim Sahnger, VP of Palm Beach Financial Network in Sewall's Point.
'Many of these people are now over-leveraged or they're 'upside down' -
they owe more than their house is now worth.'"

+++

"The number of late payments in Broward County hit
983 in February, a 333 percent increase over the 227 last February, according
to Realestat.com. Broward had 315 foreclosures last month, compared with
206 in February 2006."

"Last month, Palm Beach County had 733 property
owners with late payments, up 382 percent over the 152 last February."

"Honey Hartman of Hollywood is facing a mortgage
crunch. A huge property insurance increase this year pushed her monthly
mortgage payment to $770, which exceeds her income of $643."

"She negotiated with her lender to cut some of the
added costs, and her two grown children are helping her make up the rest
of the shortfall. Hartman expects she'll ultimately have to sell her two-bedroom
home and leave South Florida. 'I'm in dire straits,' she said."

+++

The St Petersburg Times. "The developers
of Trump Tower Tampa learned Wednesday that they can't stop buyers from
suing to get back deposits on the much-delayed condo high-rise."

"For Tom Long, the attorney arguing against Trump
Tower, the ruling has significance beyond his clients. 'I think this now,
frankly, opens the floodgates to others to demand their money back,' Long
said. 'It's a three-year project and they're at ground zero.'"

"Long said developers, more than $3-million behind
in paying contractors, may lack the money to come up with refunds."

"You can't believe how bad it's going to get before
it gets any better," the prominent U.S. fund manager told Reuters
by telephone from New York.

"It's going to be a disaster for many people who
don't have a clue about what happens when a real estate bubble pops.

"It is going to be a huge mess," said Rogers,
who has put his $15 million belle epoque mansion on Manhattan's Upper West
Side on the market and is planning to move to Asia.

Worries about losses in the U.S. mortgage market have
sent stock prices falling in Asia and Europe, with shares in financial
services companies falling the most.

Some investors fear the problems of lenders who make
subprime loans to people with weak credit histories are spreading to mainstream
financial firms and will worsen the U.S. housing slowdown.

"Real estate prices will go down 40-50 percent in
bubble areas. There will be massive defaults. This time it'll be worse
because we haven't had this kind of speculative buying in U.S. history,"
Rogers said

"When markets turn from bubble to reality, a lot
of people get burned."

The fund manager, who co-founded the Quantum Fund with
billionaire investor George Soros in the 1970s and has focused on commodities
since 1998, said the crisis would spread to emerging markets which he said
now faced a prolonged bear run.

"When you have a financial crisis, it reverberates
in other financial markets, especially in those with speculative excess,"
he said.

"Right now, there is huge speculative excess in
emerging markets around the world. There will be a lot of money coming
out of emerging markets.

"I've sold out of emerging markets except for China,"
said Rogers, long a prominent China bull.

Even in China, the world's fastest expanding economy,
Rogers said stocks were overvalued and could go down 30-40 percent.

But he added: "China is one of the few countries
in the world where I'm willing to sit out a 30-40 percent decline."

The last stock market bubble to burst was the dot-com
craze which sparked a crash from March 2000 to October 2002

When the last bubble burst in Japan, said Rogers, stock
prices went down 85 percent despite the country's high savings rate and
huge balance of payment surplus.

"This is the end of the liquidity party," said
Rogers. "Some emerging markets will go down 80 percent, some will
go down 50 percent. Some will most probably collapse."

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Excerpt from Richard Russell's Dow Theory Letter:

I just received the latest copy of Robert Campbell's
terrific "Campbell Real Estate Timing Letter" (858 481 3235).
Robert was one of the very first to call the top of the real estate boom
back in August 2006. Robert uses both fundamentals and technicals in his
report. He runs what he terms his "Real Estate Crash Index" which
is a composite of various vital items such as existing home sales, notice
of defaults, and the number of foreclosure sales. The Index applies to
Southern California, but I think it acts as a barometer for the entire
nation's real estate situation. Robert notes that the current reading on
the Crash Index "is the lowest reading since the data was first collected
in 1982."

Writes Robert, "If falling home prices put the US
economy in recession, as I suspect it will, my guess is that a credit contraction
will be far worse for the US housing market. This is because housing is
highly overvalued and so incredibly over-leveraged. Trillions of dollars
of mortgage debt were extended to people with no ability to pay them back."

Robert Campbell sees the picture as an enormous credit
boom just a huge expansion of credit. And he notes that every boom based
on a massive credit expansion ends with a massive credit contraction.

I'm very much afraid that Robert Campbell will prove
to be right. If so, it promises to be a heck of a year in 2007.

``We believe we are in the early stage of a correction
in this market and that the market will eventually implode,'' New York-based
Paulson & Co., which manages $11 billion, said in a letter to investors
last week. Paulson said bad loans held by the riskiest borrowers will ``skyrocket''
and ``most, if not all, of the independent originators will go bankrupt.''

Paulson and New York-based Harbinger posted record gains
last month on credit derivatives that increased in value as prices for
securities backed by subprime loans fell. Paulson's 8-month-old credit
fund gained 67 percent, swelling assets to almost $2 billion. Harbinger's
$6 billion distressed-debt fund returned 8.1 percent, according to an investor
update. Both firms said they continue to bet loan defaults will rise.

Investors holding mortgage-backed bonds stand to lose
$100 billion from defaults on $10 trillion in outstanding home loans, Citigroup
Inc. bond analysts said this month. Hedge funds have profited from the
rising costs of insuring against defaults and from fears that Wall Street
will finance fewer subprime loans, hurting new-home sales and the economy.

Banks ``will shut down their origination platforms,''
and the business of pooling subprime loans into packages of securities
``will all but disappear,'' Paulson said in its letter. ``While the bonds
have fallen significantly, we think they have much further to fall.''

Greenspan Warning

John Paulson, president of Paulson & Co., declined
to comment through a spokesman.

Former Federal Reserve Chairman Alan Greenspan said today
that he expects subprime-mortgage defaults to ripple through other areas
of the economy, especially if home prices fall. ``If prices go down, we
will have problems,'' he said at the Futures Industry Association meeting
in Boca Raton, Florida.

Hedge funds are private and mostly unregulated pools
of capital whose managers can buy or sell any assets and participate substantially
in profits from money invested. They are allowed to take short positions,
which is a bet that the value of a security will fall.

They returned an average of 0.65 percent globally in
February, which ended with a selloff that battered stock markets, according
to Hedge Fund Research Inc. The industry oversees $1.4 trillion, the Chicago-based
firm estimates.

Credit-Default Swaps

Harbinger's $6 billion fund that invests in high-yield
debt and assets of troubled companies had 60 percent of its assets allocated
to short positions, including bets on declines in mortgage securities,
according to its monthly investor update from Philip Falcone, 44, the firm's
founder and senior managing director. That compared with the fund's typical
35 percent allocation to short positions, according to an investor who
declined to be named because the information is private.

``Note that these are individual collateral pools, not
the ABX Indices,'' Harbinger said in its investor letter.

ABX indexes allow investors to buy into derivatives called
credit-default swaps on multiple securities. Bearish investors have used
ABX bets to wager against the health of subprime mortgage lenders.

More than two dozen mortgage lenders have closed or sold
assets since the start of 2006 as delinquencies and defaults among high-risk
borrowers climbed to their highest rate since at least 2003. Shares of
New Century Financial Corp., Fremont General Corp. and other companies
have plunged, while foreclosures have increased even among borrowers with
high credit scores.

Kensico

``We believe that the market will continue to be tested
in the weeks and months ahead, as the subprime situation unfolds amid a
choppier market backdrop,'' Falcone said in the letter.

Paulson wagered on declines in mortgage-backed bonds
in every strategy it employs, including through funds that invest in companies
going through mergers. ``While not directly related to merger activity,
we thought the subprime short provided a valuable indirect hedge,'' according
to the fund's investor letter.

The bet helped Paulson return 13 percent and 25 percent
last month in its two merger arbitrage funds, which have $6 billion in
combined assets, it told investors.

Kensico Capital Management, a Greenwich, Connecticut-based
hedge-fund firm with more than $1 billion in assets, returned 5.4 percent
in February in the onshore version of its Kensico Partners LP fund, bringing
the gain to 8.6 percent at month's end, according to an investor.

`Stay Tuned'

The fund, which started in January 2000 and is closed
to new investors, invests primarily in stocks. In the fourth quarter, Kensico
added credit-default swaps on subprime mortgage securities it saw as ``particularly
vulnerable to future losses, such as loans with low documentation or high
ratios of loan to value,'' according to a quarterly update sent to investors
Feb. 7. The letter came from Michael Lowenstein and Thomas Coleman, co-founders
and co-presidents of the fund. Lowenstein, 48, declined to comment.

``We can make money if credit spreads return to the more
historical norms, and we can make a lot of money if subprime mortgage losses
are somewhat higher than forecast at the time of issuance,'' the managers
told Kensico investors. ``Stay tuned.''